Understanding politics via economic theory

In the 1960s, Delhi University used to have a “combined” honours degree, modelled on the PPE of Oxford or the Tripos of Cambridge. But they discontinued it in 1966, I think.

Had they strengthened it instead, rather than treating it as a souped-up BA pass course, I think we would have had a far better-informed cohort of social-science graduates because politics, economics, and philosophy shouldn’t be taught and learnt in isolation from each other. That creates a silo mindset which never leaves the person.

One bad consequence of that hasty deletion of the combined honours course was that it took nearly 30 years after that for educated Indians to understand a basic truth: While political practice and economic policy must be independent of each other, political practice cannot be understood by scholars and observers of politics without knowing at least some basic economic theory.

Hence my submission: Political practice can in fact be viewed as the goings-on in an oligopolistic market structure because political competition is basically what economics calls oligopolistic competition, in which a few interdependent producers compete.

If you think about it a bit, you will see how this is exactly what the political system in India is. That’s why it makes sense to look at how economics has analysed the behaviour of such oligopolistic producers, called firms.

There are five types of oligopolistic competition that economics has discussed: Cartels, Stackelberg, Cournot, Bertrand and contestable markets. All but the last one mirror politics.

Thus, the essence of cartelisation is collusion. Everyone knows firms collude. But you can see it all the time between political parties also, even where there are only two of them. The Central Hall is meant for facilitating this collusion.

But collusion doesn’t work very well because there’s an inbuilt incentive to cheat. That’s why cartels — or in the case of politics, coalitions — are so unstable.

Then you have the Stackelberg type of competition, where one firm is the market leader and other firms are followers. Heinrich Freiherr von Stackelberg was a German economist and a member of the Nazi party.

The Stackelberg model stacks up well with Indian politics. Until 1990, the Congress was the leader and others followed it, mostly via fake socialism. Now they follow the Bharatiya Janata Party (BJP) and its Hindutva.

A basic economic requirement of this model is that firms should be selling homogeneous products. Translated into politics that means either socialist or pro-Hindu policies. Firms in this model compete on output or, in the case of political parties, claims of poorly defined good governance.

Next, we have the much older Cournot type of oligopoly. Antoine Augustin Cournot was a French philosopher and mathematician. In his spare time he thought about economics. In his kind of oligopoly all firms produce the same stuff — in politics, populism — and compete for market/vote share.

The Bertrand model of oligopolies is named after another French economist, Joseph Louis François Bertrand. He said everything in such oligopolies depends on whether the products are homogeneous or differentiated.

Examples from politics are the Congress and Aam Aadmi Party (AAP). They are totally homogeneous, which is why AAP has been stealing Congress votes.

But AAP and the BJP are differentiated because while both have welfare-type policies, AAP doesn’t push the Hindu agenda because it can’t compete there.

Lastly, there is the contestable markets theory, which doesn’t apply to politics I think because it requires very strict conditions of cost recovery after entering a market. Basically, all the costs have to be recovered in the case of failure. That’s not how it works in politics. All sunk costs are lost forever.

Now let’s see how these theories can explain the nature of political competition in India. The starting point has to be the fact that any group of people that is large can start a political party or at least become a pressure group demanding either money or seats in the Assembly.

You can see all the elements of oligopolistic competition here: A few producers, their interdependence, large numbers of buyers, and a constant endeavour to maximise either profits (seats) or market shares (vote shares).

You may well ask, so what? So nothing really except I think it was important to point out to our political pundits that a framework exists via which Indian politics can be analysed in a more precise way instead of the wishy-washy and unsatisfactory way we have now, which allows all and sundry to call themselves experts.

And, collaterally, here’s a blasphemous thought: Universities should downgrade the honours courses and upgrade the pass courses. That’s where the real value lies.